World can replace oil lost to Iran sanctions: U.S.

WASHINGTON (Reuters) - Global oil producers appear to have enough spare capacity to make up for Iranian exports curtailed by tough new sanctions, U.S. Energy Secretary Steven Chu said on Thursday.

Chu said it was important that sanctions be used to crimp Iranian oil sales to ensure Tehran does not develop nuclear weapons, despite the release of an Energy Information Administration report this week that showed supplies are tight.

"There is spare capacity and we believe - we'll see - but I think there is sufficient spare capacity," Chu told reporters on Capitol Hill, noting that the administration will do whatever it can to help stabilize oil prices, including looking at tapping strategic reserves.

"It would be very destabilizing, I think everybody would agree, if Iran developed nuclear weapons. We're trying to convince Iran in its best interests not to go in that direction," he said.

The final determination on whether there is enough spare capacity is up to President Barack Obama, who will announce it to Congress by the end of the month.

Chu's confidence in supplies speaks to the "tough balancing act" faced by the Obama administration as it implements the sanctions, said Suzanne Maloney, a former State Department adviser and now a senior fellow at the Brookings Institution.

The administration must show it intends to crack down as a deterrent to countries that buy Iranian oil and "unnerve Tehran's confidence in its ability to ride out these pressures," Maloney said.

Iran maintains its nuclear program is for peaceful purposes and denies it is trying to build nuclear weapons.

Obama must also fend off any ideas in an election year that he is anything but tough on Iran, said David Pumphrey, an analyst at the Center for Strategic and International Studies.

"'We think we are capable, in effect, of seeing this through' - that's how I would read the messaging," said Pumphrey, a former Energy Department official.

"GREEN LIGHT" FOR SANCTIONS - LIEBERMAN

In a report that is part of the new sanctions law, the Energy Information Administration (EIA), an independent arm of the U.S. Energy Department, found that Saudi Arabia has been pumping more oil.

Saudi Arabia, which has the world's biggest spare oil capacity, has produced an average of 9.7 million barrels per day over the last two months, up 600,000 bpd from the same period last year, the EIA said.

But the EIA also said the cushion provided by that spare capacity was modest by historical standards: 2.5 million barrels per day, compared with an average of 3.7 million bpd a year ago.

That cushion is about equal to total shipments from Iran, the world's third-largest oil exporter.

Relying on the spare capacity "will require everything to work almost flat out, and hoping that additional capacity can come online smoothly," said Sarah Emerson at Energy Security Analysis Inc in Boston.

"I think we need to expect some hiccups along the way."

U.S. sanctions on foreign banks that handle Iranian oil payments begin to take effect in June. But Obama, under a law he signed late last year, can offer exemptions to countries that show they have "significantly" cut their purchases from Iran.

"We still don't have a definition of significant yet. It's a bit of 'the eye of the beholder,'" Pumphrey said.

There is strong political pressure from Congress to push ahead. Senator Joe Lieberman, an independent, said the EIA report was a "green light" to implement aggressively the energy sanctions.

"With sufficient spare capacity among global oil producers, there is no excuse for countries and companies around the world not to curtail their purchases of Iranian crude, and thus deny the Iranian regime the financial lifeblood it needs for its illicit nuclear activities," Lieberman said in a statement.

OIL RESERVES ON TAP?

Obama faces mounting political fire for high gasoline prices, which are due in part to tensions in the Middle East.

Chu told lawmakers at a hearing on Thursday that the administration is doing what it can to ease the sting of high prices on consumers and businesses.

Some Democrats have urged the administration to release oil from its Strategic Petroleum Reserves, but Chu declined to comment on how or whether the new analysis from the EIA would affect that decision.

"The president will use whatever tools he has to do what we have to do. We have the SPR option on the table," Chu told reporters.

U.S. House of Representatives Speaker John Boehner said Obama does not seem to support a release as a way to curb rising gasoline prices.

Republican Senator Lisa Murkowski said the reserves, stored in huge salt caverns, should be saved for real supply emergencies rather than to try to ease prices.

"I understand that tightness in world oil markets and the pressing need for sanctions on Iran leave you in a difficult position," said Murkowski, the top Republican on the Senate Energy Committee.

"It is critical that we fully enforce our sanctions regime and preserve our strategic stockpiles until we really need them," she wrote to Obama.

Additional reporting by Rachelle Younglai and Timothy Gardner in Washington, and David Sheppard in New York; Editing by Dale Hudson, Bob Burgdorfer, David Gregorio and Paul Simao